ANZ and NAB have both tightened their lending standards to stop households taking on mortgages they can’t handle as interest rates rise.
This could make it more difficult for people hoping to secure a loan to buy a home, but also protect households from sliding into mortgage stress.
Rising interest rates and pressure from regulators has prompted the banks to review their lending criteria.
The Australian Prudential Regulation Authority (APRA) has been leading efforts to encourage banks to reduce high-leveraged lending - alongside the Australian Securities and Investments Commission (ASIC), the Reserve Bank of Australia (RBA) and Treasury.
An ANZ spokesman said the bank had recently told its brokers and bankers it would only accept home loan applications from households with a debt-to-income (DTI) ratio less than 7.5, citing the “changing interest rate environment” as the reason for the move.
That means, as of June 6, the bank will no longer be accepting loan applications from borrowers with total debts 7.5 times their income. In the past, it would consider applications with DTI ratios of 9.
“ANZ regularly reviews lending appetite and policies as the economic environment changes to ensure we are continuing to lend prudently to our customers,” a spokesman told Yahoo Finance.
NAB also recently advised its brokers and banks that the maximum DTI ratio it would accept would be 8 instead of 9.
“We are committed to lending responsibly and want to ensure customers are able to appropriately manage their repayments, both today and in the future,” NAB executive Kirsten Piper said.
“To do this, we work with all customers to understand their individual circumstances and assess applications based on a range of measures.
“NAB will continue to put responsible lending first in its approach to credit and we welcome ongoing consultation with regulators.”
When queried about its lending standards, a Commonwealth Bank spokesperson said the bank applied tighter lending parameters for borrowers with small deposits and debt-to-income ratio above 6.
Westpac automatically sends home loan applications with a DTI of 7 or more to its internal credit team for individual assessment, according to a spokesperson from the bank.
Other ways banks and regulators try to prevent risky mortgages is by checking if households will be able to make their repayments if interest rates rise.
In October last year, APRA and other financial regulators agreed that borrowers should be forced to prove they could pay back their mortgage if interest rates increased by 3 per cent. Before that, they had to prove they could cover a 2.5 per cent increase.
These restrictions reduced borrowers’ maximum borrowing capacity by around 5 per cent.
Why is this important?
The booming property market has left many households with massive mortgages that are sensitive to rising interest rates.
According to data released by APRA in March, almost one in four new mortgages were considered ‘risky’.
APRA’s ADI property exposure report for the December 2021 quarter found 24.4 per cent of new mortgages had a debt-to-income ratio of 6 or more, in dollar terms.
This was up from 23.8 per cent in the September quarter. A year ago, it was just 17.3 per cent.
Debt-to-income ratios of 6 and over are considered ‘risky’ by APRA.
People needed to bring in a lot of money each month to avoid the ‘risky’ categorisation.
Analysis by RateCity found that to buy a median-priced house in Sydney, you would need a household income of $188,331 to avoid taking on a risky loan.
In Melbourne, households would need to earn $133,336 a year to have a debt-to-income ratio lower than 6.